Buyside selling and Downgrades (veezq-46151)

This week, we highlight a market structure matter observed in at least three separate cases: the actions of sellside desks in and around upgrades and downgrades.

In this article, we'll highlight a recent market structure matter observed in at least three separate cases: the actions of sellside desks in and around upgrades and downgrades.

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We’ve said before that sellside firms, particularly what we call the big Prime brokers, have evolved into purveyors of services rather than providers of information to buyside clients. Order flow indicated that Primes went the extra mile, putting capital at risk to help important institutional clients manage risk in the present uncertain equity-markets environment. Short interest, a function of risk management more than specific shorting, is up. Wholesale order flow is up (brokers transacting with brokers). Electronic volume is down (the buyside is asking the sellside for its commitment and assistance).

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Back to the central point, we saw anecdotal evidence that a number of downgrades (for specific firms and for industries) might well have been reactions to selling already originating on the buyside. We also saw some evidence of substantial activity ahead of upgrades. Please note: we are NOT suggesting impropriety. But we are suggesting that certain sellside actions may be a result of what the buyside says rather than what equity research folks think.

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This data exists at both Nasdaq Online and NYSENet to help investor relations professionals examine your own order flow. Look at activity for a given firm on the day of an upgrade or downgrade, and also volume on either side versus trailing averages. Nasdaq firms, you’ll have to back into the data (drop me a note and I’ll explain); I know because I did it as a Nasdaq IRO.

Why does it matter to your investor relations program? Well, for all kinds of reasons, not the least of which is understanding who actually influences your price, and who is merely capitalizing for economic gain on transactional opportunities. These details can only be seen, by the way, in executed order flow.